Joseph Elgindy - Director of IR & Strategic Planning Fusen Chen - CEO, President & Director Lester Wong - Senior VP of Legal Affairs, General Counsel & Interim CFO.

Craig Ellis - B. Riley FBR, Inc. Thomas Diffely - D.A. Davidson & Co. Greg Eisen - Singular Research.

Greetings, and welcome to the Kulicke & Soffa 2018 First Fiscal Quarter Results Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Joseph Elgindy, Director of Investor Relations and Strategic Initiatives for Kulicke & Soffa. Joseph, you may begin..

Thank you, Garren. Welcome, everyone, to Kulicke & Soffa's First Fiscal Quarter 2018 Conference Call. Joining us on the call today is Fusen Chen, our President and Chief Executive Officer; and Lester Wong, our General Counsel and Chief Financial Officer.

For those of you who have not received a copy of today's results, the release as well as the latest investor presentation are both available in the Investor Relations section of our website at investor.kns.com. In addition to historical statements, today's remarks will contain statements relating to future events and our future results.

These statements are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Our actual results and financial condition may differ materially from what is indicated in those forward-looking statements.

For a complete discussion of the risks associated with Kulicke & Soffa that could affect our future results and financial condition, please refer to our recent SEC filings, specifically the 10-K for the year ended September 30, 2017. I would now like to turn the call over to Fusen Chen for the business overview. Please go ahead, Fusen..

Thanks, Joe. This quarter, we booked a $105 million charge specifically related to the impact of Tax Cuts and Jobs Act of 2017. Due to this large charge and our ongoing trend to further expand our market, drive share gains and the improved overall profitability, we had supplemented our earnings release with non-GAAP financial metrics.

Lester will provide some additional information shortly regarding our non-GAAP approach. Going forward, our remarks will refer to GAAP results unless noted. For the December quarter, we started out fiscal 2018 with strong results.

We delivered $213.7 million of revenue, way above guidance; gross margin of 46.3% and the operating income of $38.6 million. Excluding the impact of tax reform and our other non-GAAP items, non-GAAP diluted EPS was $0.54.

This operational performance was stronger than our expectations a few months ago and dramatically stronger than our trailing December quarter average largely due to favorable semiconductor-related industry condition and also the slightly earlier- than-anticipated recognition of revenue associated with automotive-related shipment from prior periods.

Our significant exposure to positive trends in advanced packaging, automotive, flash memory, LED, in addition to industry's ongoing capital intensity, are anticipated to continue driving strong operating performance through fiscal 2018.

Much of our incremental earnings were driven by our capital equipment segments while Aftermarket Products and the Service segment, APS, performed in line with our aggressive trends. The strength from capital equipment was driven by strong demand primarily for our ball bonding, wedge bonding and the wafer label packaging offering.

Our ball bonding business was up 10% from the same period last year. Ongoing strength in NAND flash, LED and the general semiconductor were the primary driver of this upside. Additionally, we enjoy continuous strengths within our advanced packaging business, specifically with our wafer label packaging offering.

This performance support optical and the nonoptical sensor capacities and they continue to benefit from premium mobile image and the 3D sensor assembly needs.

Looking forward, the compound annual unit growth rate for nonoptical sensor, 2017 through 2021, is projected to grow at a nearly 11%, and then a larger optical sensors market is anticipated to grow at a nearly 16% over that same period. We continue to shift our new opportunities for this unique and competitive advanced packaging offering.

Finally, revenue of our APS business had increased by 19% over the same period in the prior year. We remain focused in driving share gains and to further enhancing this recurring revenue basis business as we move forward. I would now like to turn the call over to Lester Wong, who will cover this quarter's financial overview in greater detail.

Lester?.

Thank you, Fusen. My remarks today will refer to GAAP results unless noted. Net revenue for the quarter was $213.7 million. Healthy gross margins of 46.3% generated $99 million of gross profit. This represented a nearly 45% increase in gross profit over the same period in the prior year.

During the quarter, we generated $38.6 million of operating income and booked a net income loss of $69.3 million and negative EPS of $0.98. On a non-GAAP basis, which primarily excludes a onetime tax charge related to the $105 million impact of the Tax Cuts and Reform Act of 2017, EPS was $0.54.

As Fusen mentioned, this is a very strong performance during what has historically been viewed as a seasonally soft quarter. At 46.3%, gross margin came in stronger than we anticipated, largely due to product mix between automotive, advanced packaging and LED equipment.

While wedge bonding and advanced packaging contribution benefited the December quarter's gross margin, we anticipated LED demand to increase substantially and forecast a March gross margin of slightly below 45% as we discussed in our September quarter conference call. Turning to the balance sheet.

We ended the December quarter with a total cash and investment position of $650.2 million or $9.21 on a per share basis. On a book value per share basis, we closed the December quarter with $12.05. Working capital, defined as accounts receivable plus inventory less accounts payable, decreased by $57.1 million to $212.1 million.

From a DSO perspective, our days outstanding decreased from 83 days to 73 days. Our days sales of inventory decreased from 99 days to 84 days, and days of accounts payable increased from 42 days to 54 days. As a result, our cash conversion cycle reduced from 140 days to 103 days sequentially.

Lastly, I want to briefly discuss the impact of the recent tax reform and our non-GAAP methodology. For tax reform, we ultimately expect it to allow greater flexibility of our global resources, further simplicity of our global entity structures and ultimately a reduced cost for future U.S. cash deployment.

While the impact of the associate regulation of the Tax Cuts and Jobs Act of 2017 to our further global entity structure is not yet crystal clear, our near-term strategy of driving fundamental improvements through organic development and strategic M&A, while opportunistically executing open market repurchase program is unlikely to change.

Due to the significant size of this extraordinary item and also our focus on operational efficiency and business expansion, we decided to introduce non-GAAP reporting beginning in the December quarter. We believe this provides the investment community with an additional level of transparency to supplement our U.S.

GAAP reporting as we work to expand our markets, drive share gains and improve overall profitability. This concludes the financial review portion of our call. I will now turn the discussion back to Fusen for the March quarter's business outlook..

Thanks, Lester. Looking into the March quarters. We are targeting revenue to come in between $205 million and $215 million and are anticipating another very strong fiscal year.

While we have historically enjoyed a sequential increase in the March quarters, as discussed earlier, our free guidance was largely related to earlier-than-expected revenue recognition of some automotive-related solution in December quarters.

Regardless, considering the strong guidance, the first fiscal half is anticipated to be approximately 21%, higher than the first fiscal half of 2017, setting a new record for the company.

Ongoing effort to broaden our base of solution and drive fundamental business improvement are expected to further mitigate seasonal and cyclical effects while driving new record for the company.

Through 2018 and beyond, we continue to be aligned with some of the fast growing segments in the semiconductor space, including automotive, memory and the front-end expansion in China as well as Korea.

Automotive IC units are anticipated to increase by 16% in calendar 2018 and are forecast to be growing electronic system market -- are forecast to be the fastest-growing electronics system market through 2021. We will continue to support the capacity and the new technology needs of our global automotive customers throughout this long-term evolutions.

Within memory, our shipment of NAND flash effectively doubled in fiscal 2017 over fiscal 2016. We continue to anticipate flash memory capacity to be added at roughly the same pace as it was in 2017 when it amounted to approximately 10% of total revenue.

Next, global semiconductor capital equipment spending is projected to increase again in calendar year 2018 after a fairly significant increase in 2017. This high level expectation is anticipated due to an additional demand for our core ball bonding, wedge bonding and the APS offering.

In addition, we continue to seek out new advanced packaging opportunities that will further broaden and diversify our business. Overall, we are very excited with our operation and the development opportunities as we look ahead. We thank you for your continued support.

We all remain extremely committed to execute our strategy and to deliver value to our shareholders. This concludes our prepared remarks. Operator, we will now be happy to take your questions..

[Operator Instructions]. Our first question comes from Craig Ellis of B. Riley and Co..

Fusen, I wanted to start off just by following up something that was topical on the last call, which was an interest from the company to pursue the lower end of the LED market. I think at that time, the company noted that there might be some gross margin impacts as you hope to gain share.

Can you give us an update on what's happening in that area in 2018?.

Sure. Compared to 2017, I think we will gain about 10% more for LED bonder compared to total bonder. So 2018, I think we'll ship roughly 20% of all bonder will be LED bonder and this is a significant increase.

And as I discussed in the previous earnings call, our gross margin will be slightly impacted, slightly below 45%, but we are working hard to recover above our 45% gross margin..

Okay.

And then moving on to the automotive item that you identified impacted the first quarter favorably and presents a tough comp to the second quarter, can you talk about what you see in that business as we move through the rest of the year? And were there any other early shipments that occurred? Or was it just in automotive?.

Okay. So our revenue policy is after we're accepted by customers, it becomes a recurring revenue. But for the new customer or existing customer in a new facility, our revenue recognition policy is by acceptance, once accepted in a new location and the revenue is by shipment.

So for this case, actually, a low customer already pay, when we ship the system, we wait until the customer recognize the performance or system then we start to recognize the revenue. So all these expectation is this amount of revenue, roughly $20 million, we expect to recognize in Q2.

But customer actually accepted a few weeks compared to our expectation. Therefore, we have much higher revenue in Q1 compared to our Q2..

That's helpful. Moving on to the NAND business. Clearly, that was very strong last year. There's been some recent concerns about NAND pricing and its impact to capital spending, even though I think bit growth expectations remain about 40% to 45% year-on-year, at least. 40% was the number that Samsung referred to last night.

So if we have an environment where bit growth is flat and pricing is down, what kind of impact, if any, does that have on your exposure to the NAND market and your expectations for growth?.

Well, I think if you look at memory, when you roughly calculate, will be about, maybe, 10% of our total revenue, and we are exposed to our market -- to our industry. So one way I look at it, we're still very bullish on the memory. And the up and down is really part of our life.

If you look at it, the industry actually transition from a 48 to a 72 layers. This will make actually solid-state drive more competitive compared to a hard drive. Therefore, there will be share gain for solid-state drive. That probably will spur more capacity in the future. So short term, I think up and down is the nature of our life.

We just try to diversify our products and focus on priority. And we assume, we try to mitigate the seasonal and cyclical effect, and I believe we should do well..

That's helpful.

And then the last one for me and I'll hop back in the queue, can you mention if that there was any share repurchase in the quarter? And if so, how significant was it?.

I will hand to Lester to talk about it..

Yes. Hi, Craig. We repurchased about 148,000 shares roughly about $3 million..

Okay.

And then just related to that, given the tax change that's been made, how should investors think about the appetite for share repurchase activity in 2018 versus a continuation of some of the inorganic initiatives that we saw last year?.

So Craig, I think our capital allocation strategy is a split, it's somewhere between roughly evenly between acquisition, new organic development, and also shareholder returns is a longer term by the opportunistically the open market repurchase program. I think while obviously the U.S.

tax reform has allowed the repatriation of cash a little bit easier, I think, for now, we are continuing with that strategy. However, the board, as well as management, is continuing to look at what's the best way of capital allocation to drive the company's growth as well as return -- increase shareholder value over the short and longer term..

Our next question comes from Tom Diffely of D. A. Davidson..

I guess, first something a little more on the wedge bonder business, it had been a pretty nice growth driver the last couple of years. Curious what -- it has been performing lately and what you expect for 2018..

Well, actually, we are very bullish in our wedge bonder business. As you know, other than the ball bonder, we are #1 market share in the industry. Wedge bonder we are also number one. And as you know, we gain the shares in automotive particularly and also a lot of high-credit application like in the battery.

And that's the area, I think, that we are quite confident..

Okay. Assuming that continues to outpace your core business in 2018? On a growth--.

Well, we try to grow both in advanced packaging and our core business while advanced packaging markets are getting bigger, we also expect our core business including ball bonding, wedge bonding, EA, so is APS will also grow as well..

Okay. So just to clarify, you said in 2018 you think you can get the LED to the -- bonder business to be 20% of your revenue.

Is that a doubling of LED bonder business year-over-year?.

So actually, let me clarify. 20% of our total ball bonder shipped..

Oh, per unit basis..

Yes. So in terms of total unit, if we ship this year, we ship, say, 10,000 system, 20% is going to be LED bonder, bonder unit..

Right, okay. And so it's a very nice percentage increase just for overall unit shipments for you and a big increase for revenue alone..

Yes. We do believe there will be more market share to gain in the -- in coming years..

Okay. And then maybe just quick question on the operating expenses.

Any impact from the recent changes on tax? Anything at all that would impact how you view different expenses or plans to grow expenses or expand it in different regions?.

Hi, Tom. This is Lester. No, we're still looking at about $53 million per quarter on a GAAP basis of 5% to 7% variable, what we've always guided..

Okay.

And then finally, if you look at the -- for non-GAAP $0.54 that you provided us with, is that only excluding the tax impact? Or is there other non-GAAP items in there as well?.

Yes, there are other non-GAAP items in there. There's the tax impact. There's amortization as well as there's a small restructuring charge..

[Operator Instructions]. Our next question comes from Greg Eisen of Singular Research..

My question is your recognition of the tax effect of this new legislation, you have a large income tax payable amount that's in long-term liabilities now, $89 million and change. I think it's my understanding that this comes from the tax law and the ability to defer over a number of years the tax bill for allowing repatriation.

About what time frame will you actually pay that income taxes payable?.

Hi, Greg. It's Lester. Yes, so the total charge, which was reported today, was $105 million. However, the total cash charge will be below that as there's other deductions and things that we can take.

As far as the time of payment, according to the tax act we have 8 years to pay and the initial 5 years we pay about 8%, and then it goes up in the later part of the year. So it's interest-free over the next 8 years and the first five years is only 8% of the required tax amount..

And it's interest-free?.

Yes..

That's quite nice. Okay, and I don't think I heard -- maybe, correct me if I'm wrong, you didn't quote a growth rate for wedge bonder business this quarter. You've discussed that in prior quarters.

How much did the wedge bonder business grow this quarter?.

I think it will be significant because of our -- 81%? Actually, because of we have earlier-than-anticipated revenue recognition, so actually it's very high. It's close to 80%. But we will say, actually, this will not be normal compared to our previous case, but growth rate of wedge bonder for this quarter is significantly high..

Right. And the revenue growth and the revenue this quarter was, of course, well above your guidance. And the gross margin was well above 45%, even though you -- last quarter you talked down the idea of being above 45%. Am I to understand -- because I didn't understand exactly everything you said before.

Am I to understand that it's really the automotive industry business which drove both revenues and gross margin ahead of your expectations and guidance?.

So Greg, this is Lester. I think for the quarter, for us, the gross margin is largely dictated by product mix. And for the quarter, we had a very strong automotive as well as memory, as we have indicated. And we discussed early on the call, we are aggressively moving to execute our strategic direction in terms of LED, which has slightly lower margin.

So I think, again, as we have guided going forward for the year, we believe that the gross margin will be slightly below 45%..

There are no further questions at this time. I would like to turn the floor back over to Mr. Joseph Elgindy for closing comments..

Thanks, Garren. Before closing I wanted to inform investors that we will be participating at several upcoming investor events in Hong Kong, Taipei and Singapore. Additional details on past and future events are available at investor.kns.com. Thank you, all, for the time today.

As always, please feel free to follow up directly with any additional questions. Garren, this concludes our call. Have a good day..

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation..